Federal Reserve Vice Chairman Philip Jefferson on Tuesday suggested the central bank’s key rate may have to remain at its peak for some time to cut constantly increased inflation.
In his speech, Jefferson said he expects inflation to continue to slow this year. But he omitted a reference to the likelihood of future rate cuts that he included in a previous speech in February. Instead, he said he believes inflation will fall even if the Fed’s key rate is “maintained at current levels.”
If elevated inflation proves more persistent than he expects, Jefferson added, “it would be prudent” to keep rates at current levels “for longer” to help slow inflation to the Fed’s 2% target. US consumer inflation, measured on an annualized basis, last reported 3.5%.
Jefferson’s remarks appeared to open the door to the prospect that the Fed would abandon its forecast, issued at its last policy meeting in March, that it would make three quarter-point cuts this year to its base rate, which is around 5. 3%. Chairman Jerome Powell will speak later Tuesday and could comment on the Fed’s potential rate cut schedule.
Jefferson said in February that if inflation continues to slow, it would “probably be appropriate” for the Fed to cut rates “at some point this year,” language that Powell also used. However, that phrase was removed from Jefferson’s speech on Tuesday.
Fed officials responded to recent reports that the economy remains strong and inflation is undesirably high emphasizing that they do not see any urgent need to reduce the base rate in the near future. Wall Street traders have long expected the central bank to cut its key rate at its June meeting, but now don’t expect the first cut to come before September.
The government announced this on Monday. retail sales jumped last month, the latest sign that strong job growth and higher stock prices and home values are driving up household spending. Strong consumer spending can keep inflation high because it can lead some businesses to charge higher prices, knowing that many people will pay higher prices.
In a speech Tuesday, Jefferson said the Fed estimates its preferred measure of inflation, to be released next week, rose to 2.7% in March from a year earlier, up from 2.5% in February. This increase will reflect an increase wider dissemination of the consumer price indexwhich rose to 3.5% in March from 3.2%.
“While we have seen significant progress in reducing inflation, the work to sustainably restore inflation to 2% is not yet complete,” Jefferson said.